Point of View

Depleted fund led to ESC's troubles

March 24, 2011 

— Thirty states and two territories owe the federal government a chunk of change from borrowing funds to pay unemployment benefits. North Carolina owes $2.6 billion. Ohio, our closest demographic cousin, owes about the same thing. Our neighbors are in the same boat.

Current leaders saddled with the cost of a recession and past legislative mistakes are wrongly blaming the staff of the Employment Security Commission and its chair, Lynn Holmes, for things they had no part in.

This blaming masks a political move to put the state ESC under the strong arm of an agency that must be a bold advocate for business desires. It's like putting Conservation and Development under the same roof. Whatever balance that is struck between two competing interests is outside of the public view and hence, less trusted. This would be the wrong strategy, undertaken for the wrong reasons.

In the mid-1990s, many state leaders, flush with economic optimism and made giddy by the political possibilities of befriending business owners, competed in cutting business taxes. It was a heady affair that included competition over which state did more and which leaders got political credit for it. Unemployment Insurance tax revenues desperately needed to maintain fund solvency were served up at the party.

The rule of thumb is that the trust fund should hold, as a minimum, one full year of expected benefits. This is simply to avoid the dreadful step of taxing businesses at the worst possible time. The maximum amount payable to North Carolina workers varies with the economy, as does the rate of taxes, and it is a delicate balance of ability and demand

In 1994, the General Assembly passed a law which cut everyone's tax bill in half; half of the amount needed to ensure the fund's historic balance. The fund balance was somewhere between $1.2 and $1.4 billion. A provision would automatically return the rates to the previous level if the balance in the trust fund went below $800 million as measured each August, effective the next calendar year. Good times drained the fund slowly, but that changed in late 2001.

In August 2002 the fund balance was a bit over the $800 million mark, meaning for the next 15 months, while demand was severe, the rates were frozen in half.

The trust fund reserve dropped quickly and went negative to the point of $400 million in debt. More than $237.5 million in federal funds that should have been used to modernize the computer system and facilities had to be used to pay benefits for two months.

With no support for raising taxes at the worst possible time, we fashioned a solution of borrowing without interest costs for three quarters from the federal government.

It worked then, but a wounded system, lacking modernization, limped forward on the prayer that the coffers would be refilled before the next dramatic need. The fund was about $400 million at the time of my departure.

The newest and worst recession came too quickly. The sheer financial weight of so many unemployed through no fault of their own sank the fund back into depths that could not be addressed with the same approach. Congress extended benefits for a much longer period than had been used since the computer software had been updated in 1999. Lying dormant in that software was a mistake that was unrecognized and unrecognizable until its use. In the first quarter of 2009, pieces of that defective algorithm were active for the first time in the calculation that resulted in the overpayment of some $28 million.

Now, because of two issues - the balance of the trust fund and a computer error hidden for 10 years - there is a movement to undo an agency, defrock its leader and put the agency that extends benefits to employees under one that exists for service and appeal and attraction of business.

Here we go again.

Harry Payne, now senior counsel for policy and law at the N.C. Justice Center, has served as a state legislator and as N.C. labor commissioner. He was chairman of the Employment Security Commission from 2001 to 2009.

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